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While you were sleeping: Banks offer distraction

Friday 15th October 2010

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Bank shares led a decline on Wall Street amid concern an investigation into the mortgage industry's foreclosure practices could hurt earnings, providing a distraction from the chaotic trading in the world's currency markets.

JPMorgan Chase & Co  and Bank of America pulled the Dow Jones Industrial Average while an S&P index of financial services shares dropped 2.3%.

The attorneys general of all 50 US states have begun a concerted probe of the mortgage industry, focusing on allegations that some banks did not review documents properly or submitted false statements to evict delinquent borrowers.

"This is a potential cost to factor into long-term profitability," Jefferson Harralson, a bank analyst at Keefe, Bruyette & Woods in Atlanta, told Reuters.

"Banks could be dealing with this on a loan-by-loan basis for years."

Cementing the view that the US labour market remains a concern, new claims for jobless benefits unexpectedly rose 13,000 in the latest week. Even so, the worse-than-expected data also underpinned expectations that the Federal Reserve would ease monetary policy to support the world’s largest economy.

In early afternoon trading in New York, the Dow Jones Industrial Average fell 0.52%, the Standard & Poor's 500 dropped 0.81% and the Nasdaq shed 0.63%.

"Today is really about banks and the jobless claims on one hand, and the dollar on the other," Jeffrey Friedman, senior market strategist at Lind-Waldock in Chicago, told Reuters.

"The foreclosure issue will weigh on us until we see a bottoming in the housing market, and right now, we don't know what kind of financial obligations are possible for banks."

In a reminder of the optimistic mood yesterday, data compiled by Bloomberg showed that of the 11 S&P 500 companies to have reported results since October 8, nine have beaten estimates for net income.

Analysts surveyed by Bloomberg predict profits will grow 23% from a year earlier for companies in the index, the fourth straight quarterly increase.

Investors are focused on Google set to release earnings today after the closing bell.

Bolstered by speculation that they are takeover targets Yahoo! and EMC gained 4.4% and 3.9% respectively.

In Europe, the Stoxx 600 fell 0.2% to 265.68 at the 4.30pm close in London. National benchmark indexes dropped in 16 of the 18 western European markets.

The Dollar Index, which measures the greenback against a basket of six major currencies, declined 0.56% to 76.64. Earlier in the session it dropped to its weakest since December 2009 at 76.259.

Singapore's central bank widened the currency trading band in which it maintains its dollar, propelling the currency to a record high. The country’s rising inflation was seen as the cause for this perceived tightening of policy - the opposite of what US monetary policy makers are expected to do.

Meanwhile the Chinese yuan climbed to its highest closing level against the greenback since July 2005.

"Singapore is often seen as a bellwether for the rest of the Asian currencies," Firas Askari, head of FX trading at BMO Capital Markets in Toronto, told Reuters.

"It opens the way for the region to have currency gains [against the U.S. dollar]."

The intense negative sentiment on the greenback has triggered talk of a correction, at least temporary, to counter the U.S. dollar’s recent sharp drop. While a correction would help check the pace of the slide, the trend is expected to remain intact.

The U.S. currency’s decline helped gold rise to yet another record, as investors piled into the precious metal as a hedge against currency depreciation. Analysts said the appeal of gold isn’t going to fade any time soon.

Spot gold hit a high of US$1,387.10 an ounce earlier in the day. Most recently, it was 0.3% higher at US$1,375 an ounce. US December gold futures advanced US$5.80 to US$1,376.30.

"It just doesn't seem to matter too much anymore. Dollar up, dollar down ... Investors are choosing precious metals as a safe haven just because they are the only show in town right now," Michael Daly, gold specialist at Chicago-based futures broker PFGBest, told Reuters.

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